Weekend Reading: Financial Facelift Edition

I enjoy reading the Globe & Mail’s Financial Facelift every weekend, if only just to goof on the idea that a couple earning $200,000+ per year with $3 million in the bank can be worried about their financial future. The tipping point of absurdity came when the Globe profiled Eric and Ilsa, the Vancouver couple struggling to get by on $25,000 per month.

This week’s feature was no different than usual. The couple had more than $2.5 million in assets, no debt, and income of $187,000 per year. A typical financial facelift profile (you’ll be fine, Tina). What caught my eye this time was the advice from the financial planner asked to weigh in on the couple’s situation.

The planner questioned the couple’s asset mix, which included a large amount of cash (30 percent of their portfolio) that is “creating a substantial drag on portfolio returns.” The planner goes on to say that, despite their modest investment returns, the couple will have an estate of $3.3-million at Tina’s age 90.

Then came this bizarre recommendation:

“For the fixed-income side of the portfolio, he suggests supplementing traditional fixed-income securities with some alternative income investments such as private debt, international real estate and accounts receivable factoring.”

He said by improving their investment returns the couple could retire “tomorrow” instead of in four years, as originally planned. That may be true, but a recommendation to put 20 percent of their portfolio into these alternative strategies is completely unnecessary and risky.

What purpose does it serve to complicate their investment approach? They could’ve stuck to their simple, risk-averse plan and been just fine.

But what happens all too often? The planner talks over their heads with some smart sounding strategy – that of course they couldn’t possibly attempt on their own – and suddenly the couple is paying 1 to 1.5 percent of their assets every year for ‘professional guidance’ that probably wasn’t needed in the first place.

In my experience, when a couple has more than enough money to last a lifetime, it’s better to dial back the risk and accept a lower rate of return. Not complicate matters by taking on riskier assets that the couple likely doesn’t understand.

To me this is a case of the planner trying to get too cute with this financial facelift instead of telling the couple what was painfully obvious to everyone else – they’ll be fine.

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Hi Brian, that’s a great point. Charitable giving is very personal and so I wouldn’t be surprised if the amounts and recipients are not always fully disclosed in these cases. But, you’re right. More attention needs to be paid to giving back to worthwhile causes, both local and abroad.

I had the same reaction when i read this weekend’s financial facelift. What’s wrong with large cash reserves in your sixties, especially when you have a substantial investment portfolio? Alternate assets scare me so I wont touch them. Dont understand them either. Thank you for bringing this issue to your blog. It needs to be challenged.

Hi Jan, thanks for sharing. I don’t think 30 percent cash holdings is unreasonable for this situation. They said they were nervous about the markets, which might not be rational but is understandable for a couple nearing retirement.

I think if they streamlined their equity holdings and reduced their management fees by a half percent they could eke out another 1 percent return on their portfolio. His pension, plus CPP and OAS would cover the majority of their spending needs in retirement.

It’s a nice idea to want to double their spending in retirement, but if they’re typically spending just $37,000/year I doubt very much they’ll become spendthrifts in retirement.

Interesting infographic re food prices but one has to question the validity, as American cheese is measured in “gallons” ? Also the current prices, I’m guessing in USD, are unrealistically high – would love to know how the numbers were obtained.

Hello Robb,
I so enjoy your posts and articles, wonderful and informative.
You mention complete financial face life above and that many people don’t wish to do or disclose? Why would that be?
If the possibility of improvement is there that would create an upside and alternate point of view.
Terry